Confused by all the conflicting deft relief information on the Internet? ZipDebt's 32-page consumer debt guide
has helped *tens of thousands* of people understand their options and avoid getting ripped off by shady debt companies.
If you're in deep, this is the information you're looking for. Learn why individuals and small
business owners seeking to reduce very high levels of unsecured debt MUST USE DIFFERENT TACTICS than the average consumer with $10,000 to $30,000 of debt.
If you are leaning toward debt settlement as your preferred strategy, the next decision is
whether to use the do-it-yourself approach or hire a third-party professional settlement
company to handle the negotiations for you. In this two-part article, I'll discuss some
important reasons why the do-it-yourself approach makes a lot more sense for most consumers
than using a third-party settlement company.
Update January 2011!
This two-part article was originally written in 2006. I have left it intact in order to prove a very important point.
Today, hiring a third-party debt settlement company is NOT recommended under any circumstances.
The material below on industry fee structures is now out-of-date. As of October 27, 2010, the Federal Trade Commission
rule is in force that bans the charging of advance fees for debt settlement services. The resulting CHAOS in the debt industry is fully described in
my recent blog post, "The Future of Debt Settlement."
DEBT SETTLEMENT FEES
The first big reason why DIY debt settlement is better than using a third-party company is the
FEES involved. With a professional company, you can expect to pay steep fees under one of two
pricing systems that are used in the industry. In the following paragraphs, I will describe these
two systems and give an example of how the fees would work under each system.
Contingency Fee Structure
1. Administrative fee (3% to 6% of debt enrolled)
2. Monthly service fee ($30 to $80 per month)
3. Negotiation fee (25% of savings on each account settled)
Example 1: You have $30,000 of debt. You hire a settlement company that charges 4% of the debt as an
administrative fee, plus $40 per month, plus 25% of whatever they save you in the negotiation. You
agree to a monthly payment into the program of $600. Assume the company manages to settle all your
debts for an average of 40 cents on the dollar. At $600 per month, it will take 32 months to complete
the program. Your total payout to the creditors will be $12,000. Your three different fees will add up
to $6,980 ($1,200 administrative, $1,280 in monthly fees, plus $4,500 in negotiation fees). So your
total payout will be $18,980 ($12,000 to the creditors, plus $6,980 in fees).
January 2011:
The only legitimate fee structure under the new FTC rule is one based on savings achieved in the negotiation. Most
companies attempting to comply will charge 25-30% of the savings. Numerous "loophole" companies continue attempting to
charge fees in advance, and therefore risk being shut down by the FTC.
Front-Loaded Fee Structure
1. Flat percentage of enrolled debt (12% to 16%)
2. Fee paid over 10 to 18-month period
3. Monthly service fee ($30 to $80 per month)
Example 2:You have $30,000 of debt. You hire a settlement company that charges 15% of the debt on the
flat fee method, plus $40 per month. You agree to a monthly payment into the program of $600. Assume the
company manages to settle all your debts for an average of 40 cents on the dollar. At $600 per month, it
will take 30 months to complete the program. Your total payout to the creditors will be $12,000. Your
three different fees will add up to $5,700 ($4,500 flat fee, plus $1,200 in monthly fees). So your total
payout will be $17,700 ($12,000 to the creditors, plus $5,700 in fees).
To be sure, the above examples over-simplify the whole process, mainly because the debt level will not
remain static at $30,000, but will inflate with interest and fees for at least the first six months
(assuming you were current or near-current at the time of enrollment).
At first glance, the fee structure in Example 2 might look better, because the total fees are $1,280 less
than the fees in Example 1 for the same amount of debt. However, there are two very serious problems with
this second fee structure.
First, with the negotiation fees set at a flat 15% of the enrolled debt, the settlement company makes
exactly the same amount on your case if they obtain 50% settlements as they do if they obtain 25%
settlements across the board. Either way, in our Example 2, they collect $5,700 in fees. So where is the
incentive to grind it out with the creditors to get you the lower percentage deals? At least with the
contingency-based fee structure, the company makes a percentage of what they save you, so they have a
built-in incentive to obtain lower settlements.
Second, under the Example 2 fee structure, the fees are "front-loaded," meaning they are collected during
the first 10-18 months of a 30 month (or longer) program. So during the first year or more, most of the
money you are paying into the program is absorbed by fees, and very little is left over to actually pay
settlements. If you do decide to use a third-party professional settlement company, use one that charges
a percentage of the savings, with low administrative and monthly fees. That way,
more of your money will go toward settling your accounts rather than paying fees.
With the DO-IT-YOURSELF approach, there are no administrative fees, monthly fees, and
negotiation fees (either front-loaded or based on percentage of savings) to worry about. So even if you don't
do quite so well as a professional firm at getting low percentage settlements, you'll still save a pile
of money in fees. And there is more than money to be saved. There is also TIME to be saved by getting out
of debt much faster on your own. Using the first example above, with $6,980 in fees, at $600 per month
funding level, that means an EXTRA YEAR IN THE PROGRAM!
January 2011:
The above comment on the DIY approach is still correct, except that I have proven once
and for all that consumers get BETTER SETTLEMENTS ON THEIR OWN than by hiring a third-party
debt settlement firm. Skeptics are directed to my July 2010 blog post,
"Debt Settlement Done Right," wherein I publish the BEST TRACK RECORD IN THE DEBT SETTLEMENT INDUSTRY.
Conclusion: You'll get out of debt FASTER by doing it yourself, and
you'll save $1,000s in the process.
LOSS of FLEXIBILITY
One of the most attractive features of the debt settlement approach is its tremendous flexibility.
Under virtually every other type of debt relief program, you are required to make a fixed monthly payment
into the program. This is true of debt consolidation, credit counseling, and Chapter 13 Bankruptcy. In
the past, it was NOT true of debt settlement. In other words, let's say you've agreed to $600 per month
into the program as your monthly goal or "target" payment, with the aim of settling $30,000 of debt in
less than 3 years. In prior years, it used to be possible for you to call the settlement company and say,
"Look, the car needs new tires. I'm going to need to skip my payment this month." The result was simply
adding a month to the program, and this flexibility was very important to people. In fact, it was often
quoted by customers as the number one thing they liked about debt settlement.
Nowadays, however, the third-party settlement companies have moved more and more
toward fixed monthly payment requirements. Why? Because that is how the fees are collected! If you
are not making a monthly payment, then they cannot automatically deduct their fee. This is even more so
under the "front-loaded" fee structure discussed above, but it also exists under the first example, because
that's how the monthly fees and negotiation fees are collected. So what started out as a way to provide
increased flexibility and give consumers more options and more control has evolved into a more restrictive
program with less flexibility. To be fair, some settlement companies will still allow
occasional missed payments, but if it happens too frequently, you will be dropped from the program.
With DIY debt negotiation and settlement, the original concept of total flexibility is restored.
Since you are in the driver's seat, you are completely in control over your monthly funding level.
You control the cash, and no one can cancel you if you need to skip a payment here or there!
Conclusion: The DIY approach to debt settlement restores the all-important
flexibility that struggling debtors need in order to get back on their feet financially.
In the second part of this article, we'll look at some additional reasons why doing it yourself is
safer than using a third-party debt company to settle your debts. Go to Part 2 of Debt Settlement Do It Yourself.
Charles J. Phelan has been helping people become debt-free without bankruptcy
since 1997. A former executive in the debt settlement industry, he teaches the do-it-yourself
method of debt negotiation. Audio-CD material plus expert personal coaching helps consumers
achieve professional results at a fraction of the cost. More information ...
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Confused by all the conflicting deft relief information on the Internet? ZipDebt's 32-page consumer debt guide
has helped *tens of thousands* of people understand their options and avoid getting ripped off by shady debt companies.
If you're in deep, this is the information you're looking for. Learn why individuals and small business owners seeking to reduce very high levels of unsecured debt MUST USE DIFFERENT TACTICS than the average consumer with $10,000 to $30,000 of debt.
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